IN CHINA: Property binge fuels mortgage fraud frenzy

December 07, 2017

SHANGHAI/HONG KONG/BEIJING- When Zhu Chenxia bought a flat early last year from Lei Yarong in the up-market Nanshan district of China’s southern metropolis of Shenzhen, the two women drew up three purchase agreements to cover the deal.

Only one was genuine.

In the legitimate contract, Zhu agreed to pay Lei 6.49 million yuan (about $980,000) for the 96-square-meter apartment near the city’s border with Hong Kong, according to records filed in a Shenzhen court. With the help of her property agent, Zhu cooked up a second contract with Lei that overstated the value of the flat at 7 million yuan. This one was for the bank.

If Zhu had presented her lender with the true purchase price, she would only have been entitled to borrow up to 70 per cent of that amount, or 4.54 million yuan. Chinese regulations stipulate that first-home buyers in some major cities must make a down payment of at least 30 percent to reduce bank exposure to risk. The higher valuation convinced the Bank of China to lend Zhu 4.85 million yuan, leaving the lender less buffer against a price drop.

Details of the deception are contained in a court judgment from a subsequent dispute between Zhu and Lei over the transaction. Remarkably, Zhu herself disclosed the fraud to the court when she gave evidence that showed the pair had conspired to cheat the bank and the government.

Mortgage fraud like the pair’s flouting of rules designed to protect banks is rampant in China’s roaring property market, according to interviews with buyers, sellers and dozens of property market insiders including real estate agents, lawyers, bankers, valuers and loan middlemen from three of China’s major cities and four smaller cities. Many of these people declined to be identified because they were familiar with or involved in “re-packaged” loan applications, the industry euphemism for these frauds.

A Reuters examination, including a review of court records of cases such as Zhu’s dispute with Lei, shows that across China, unqualified borrowers use fake documents to secure mortgages, while loans deceptively obtained for other purposes are funnelled into property. These frauds are often committed with the consent and encouragement of other parties to the transactions, including lending brokers, property agents, valuation companies and the banks themselves.

And these alleged crimes are rarely punished. Neither Zhu nor Lei suffered any penalty for the fraud.

Hu Weigang, a senior partner at Guangdong Shen Dadi Law Firm, would like to see the law enforced on the mainland as it is in Hong Kong, where creating a bogus document can lead to jail. But, he acknowledges, the scale of this cheating makes it virtually impossible.

While property prices in China continue to rise, mortgage fraud remains largely a hidden danger, much as subprime loans in the United States remained mostly out of sight ahead of the 2008 global financial crisis. The fear is that in a property correction, fraudulent mortgages would unravel, accelerating a collapse of housing prices in the world’s second biggest economy. This, in turn, would imperil China’s debt-laden financial system.

The danger from gravity-defying home prices is clear to the ruling Communist Party. In his marathon speech at the 19th Party Congress in October, Chinese President Xi Jinping warned about the overheated property market. “Houses are built to be lived in, not for speculation,” he said.

Top bank officials are also worried. Xu Zhong, head of the research bureau at the central bank, the People’s Bank of China, sees pitfalls ahead. “We must be very aware that rapidly rising housing prices could not only hamper our economic development, but could easily result in systemic risks and negatively impact the macroeconomy, “ Xu wrote in an op-ed for a central bank-controlled magazine in September.

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